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This column converts an excellent item by John P. Napolitano, President and CEO of US Wealth Management, in a checklist that could be used to advise clients.

John’s column focused on preparing clients for exiting their businesses. I liked what he wrote and I present here a summary in the form of a checklist with some comments. I copied much of what John wrote and didn’t use quotes, and I refer you to his full column. John also graciously allowed me to use his article as the basis for this checklist.

  1. He suggests that an eventual exit is through a sale, and I agree, but businesses can also somehow be transferred to a successor or close. Little planning is needed if you plan to work until you drop, but if not, it makes sense to do a little planning.
  2. If you don’t work until you quit, then there should be a “when” in mind. Napolitano suggests picking a hypothetical starting point for planning to begin and that’s good advice, but I think planning should start even without that date in mind.
  3. Even without a desire to sell or end the business, planning can present a way for the owner to exit on their own terms. Planning does not provide a “must-have” process. It’s a plan, that’s all. If the plan makes sense, then there is comfort. If that doesn’t make sense, then the owner needs to review their business and perhaps their personal financial situation.
  4. A first step after the client is faced with the possibility that they may not be able to work in the business forever is to do some calculations to help them determine how much they need to remain financially independent for life as well as to achieve other financial goals.
  5. You need a business valuation. While I do ratings and think they’re extremely important in guiding a customer, John makes a great suggestion to have a discussion with the customer about value and use a number that the customer has a idea of ​​what he thinks the value is. I find that many customers have an inflated perception of the value of their business, and this discussion can be used to provide some grounding. It’s also a great way to start. In this situation, it is the exchange of ideas that is important and not necessarily the actual number. For later use, changes in this “number” can be discussed, making it the baseline or starting point for measuring growth and perhaps uncovering hidden value drivers.
  6. Along with estimating value, a model must be established showing the net after-tax proceeds of an exit and the expected cash flow from that net. For these calculations I use the highest figures suggested by the client because this cash flow, however calculated, is always significantly lower than what the owner gets out of the business per hour. current. Sometimes this process is a real eye-opener when the client compares the net proceeds investment income with what they get out of the business.
  7. The reduced cash flow suggests that the exit is not a cash flow issue, but a lifestyle change. I find it helpful for clients to have an idea of ​​what they might be doing once they no longer own the business and are no longer working there.
  8. A Napolitano best practice would be to have the business fit and ready to sell at all times, especially in the event of the untimely death or disability of the owner. That’s exactly right, but it’s also a better way to run the business and make it easier to control and plan for growth.
  9. Financial statements prepared according to GAAP are essential and the type of accountant’s report depends on the size of the company. Even with a compilation, I suggest it’s important to have grades (grades are needed with a review or audit). This formalizes many issues that might be overlooked, especially with a sole proprietorship, and elevates the role of the accountant’s financial, tax, business planning and controls.
  10. When it comes to a potential sale, almost every buyer will want some sort of GAAP financial statements, and having them prepared is a necessity for that. It also gives the customer an idea of ​​how potential buyers would view the business and may even uncover less obvious value drivers. Businesses can continue to use cash accounting to file their tax returns even if they have GAAP-compliant financial statements.
  11. I agree with John that audited financial statements are better for larger companies. Audits are becoming increasingly complicated, complex and compliance driven and are the gold standard for buyers and banks. A benefit to clients is the rigor of the audit process where a company’s internal processes and controls are also reviewed. Clients should also request a management letter from the auditor and then go through it with them point by point.
  12. John says that in addition to the financials, a report on the quality of earnings is often desired. I agree, but I think it’s essential. This is a method where profits are normalized to what they would be under professional management and non-recurring non-recurring items are also eliminated from profits. This is done to arrive at the “true” annual revenue of the business without the expenses that a single owner might incur in the business while trying to “get away with it” by making certain personal expenses tax deductible. An example might be health insurance premiums for adult children that provide minimal services for the business, excess wages paid to college-aged children, or any above-market rent that landlords pay themselves for the use of premises by the company. One-time expenses such as moving expenses and accelerated capital cost allowances in excess of GAAP would also be normalized. Normalized revenue is usually the starting point for a potential buyer, but can also give the owner an idea of ​​what they are actually getting from the business.
  13. Another important point is to have records and information that can be easily transferred digitally or placed in a data room. This is useful when a buyer is doing their due diligence, but it’s a best practice for all businesses today. It can also allow employees to work remotely if necessary.
  14. John’s column also suggests hiring a mergers and acquisitions consultant. I think it is important and it can also help clients to crystallize their thoughts. However, a good start can be made with the company’s accountant, and if it looks like the deal will go beyond the preliminary preparatory stage, then the M&A consultant can be engaged.
  15. Holistic planning is a best practice and should be done regardless of how the client feels or how ambivalent they are about going out. It helps sort things out, creates order, and can set a bigger table for the customer. I have seen some of these so-called “exit” plans propel clients to greater heights and carry out aggressive growth actions.

The rest of John’s column covers succession planning with employees and family members. I believe these discussions should only take place after a succession plan or exit strategy has been developed, or the client has a pretty good idea of ​​how they would like to proceed. While John’s comments are all excellent, I would postpone these discussions until a plan is formulated, no matter how vague. This question, in itself, is very complicated and involves many alternatives and considerations.
So, here are my comments and a checklist based on John Napolitano’s column. Save it for future use and be sure to read John’s column.

Do not hesitate to contact me at [email protected] with your questions about practice management or assignments you may not be able to complete.

Edward Mendlowitz, CPA, is a partner at WithumSmith+Brown, PC, CPA. He is on Accounting Today’s list of the 100 most influential people. He is the author of 24 books, including “How to Review Tax Returns”, co-authored with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition”. He also writes a blog twice a week dealing with the issues customers have with with the Pay-Less-Tax Man Blog for the bottom line. He is an adjunct professor in Fairleigh Dickinson University’s MBA program and teaches end-user applications of financial statements. Art of Accounting is an ongoing series where he shares autobiographical experiences with advice he hopes his colleagues can adopt. He welcomes practice management questions and can be reached at (732) 743-4582 or [email protected]